Commentary provided by Mark Szycher, Vice President, Investment Specialist, AIG Retirement Services
Market Performance Snapshot* (Week ending September 24, 2021 and Year-to-Date)
- Dow Jones Industrial Average®: +0.6% | +13.7%
- S&P 500® Index: +0.5% | +18.6%
- NASDAQ Composite® Index: +0.0% | +16.8%
- Russell 2000® Index: +0.5% | +13.8%
- 10-year U.S. Treasury note yield: 1.45%
- Up 8 basis points from 1.37% on September 17, 2021
- Up 53 basis points from 0.92% on December 31, 2020
- Best-performing S&P 500 sector this week: Energy, +4.7%
- Weakest-performing S&P 500 sector this week: Real Estate, -1.5%
*Past performance is not a guarantee of future results.
Turbulent week for stocks ends in the green
Stocks swooned on Monday as concerns about the solvency of a Chinese real estate conglomerate disturbed global markets. U.S. equities recovered much of the ground by mid-week after the Federal Reserve held policy steady but signaled that tapering asset purchases may commence soon. Major indices finished the week in positive territory (the NASDAQ Composite by just 0.02%). The Fed announcement also sent the 10-year Treasury yield higher – after dropping as low as 1.30% during the early-week turbulence, it rose to levels not reached since early July, closing Friday at 1.45%.
- Monday’s sharp drop in equities was largely attributed to concerns about China Evergrande Group, China’s largest residential property developer. Slowing sales and China’s efforts to rein in speculative excesses have seen the highly levered company careening toward insolvency or bankruptcy.
- Markets grew concerned that an Evergrande default could affect banks and other industries in China and abroad, although fears abated as analysts judged that spillover effects could be contained. Nonetheless, further market impacts are possible.
- Existing home sales fell to just under 5.9 million in August – marginally above consensus forecasts, but below the 6 million during the prior month. Continued high prices and tight supply seem to be the main culprits. On the positive side, August new home sales rose and housing permits and starts were both above median forecasts.
- Initial jobless claims rose for the second straight week to 351,000 but remained near pandemic-era lows.
- IHS Markit’s surveys of purchasing managers indicated slowing growth in both the U.S. and European economies in September amid supply chain challenges and lingering virus worries. However, European growth remains above pre-pandemic levels and optimism in the U.S. services sector grew.
- Ahead of the October 1 start to the U.S. government’s new fiscal year, the House passed a continuing resolution that would extend current spending levels through December 3. The measure also included disaster recovery funding and a suspension of the nation’s debt limit through December 16, 2022. It’s unclear if the Senate will pass the measure in full. While the government funding extension and disaster relief money are uncontroversial, the debt limit increase continues to draw opposition from Republicans. Treasury Secretary Janet Yellen and Fed Chair Jerome Powell both urged Congress to raise or suspend the debt limit without delay.
- The U.S. eased travel restrictions on foreign nationals flying into the United States, replacing outright travel bans with vaccination and testing requirements, effective early November. The S&P Airlines Industry Index rose more than 8% for the week.
- The FDA and the director of the CDC approved plans to distribute Pfizer booster shots to people 65 and older and those at higher risk from COVID, including people working in sectors with substantial face-to-face interaction.
Fed holds rates steady but signals tapering
Following its two-day policy meeting, the Federal Reserve’s Federal Open Market Committee (FOMC) left the Federal Funds target rate unchanged at 0-0.25% and maintained monthly asset purchases of $80 billion in Treasury bonds and $40 billion in mortgage-backed securities. However, the FOMC signaled that a tapering decision could come at its November 2-3 meeting and expectations shifted toward a first rate hike in late 2022 rather than 2023.
- The FOMC stated that if progress toward its employment and inflation goals “continues broadly as expected, the Committee judges that a moderation in the pace of asset purchases may soon be warranted.” Fed Chair Jerome Powell added that “a gradual tapering process that concludes around the middle of next year is likely to be appropriate.”
- Powell again insisted that commencing tapering will not mean an interest rate hike is imminent. However, 9 of 18 Fed officials expect interest rates to rise by the end of 2022, whereas at the June meeting 7 of 18 held this view.
- The Fed also updated its economic projections and now expects 3.7% core inflation at the end of 2021, up from 3% in its June forecast. Core inflation is expected to fall to 2.3% in 2022.
- Powell noted the Delta variant’s dampening effect on economic activity: “Household spending rose at an especially rapid pace over the first half of the year, but flattened out in July and August as spending softened in COVID-sensitive sectors, such as travel and restaurants. Additionally, in some industries, near-term supply constraints are restraining activity.” U.S. GDP is expected to increase 5.9% in 2021 versus the 7% predicted in June. The unemployment rate is expected to be 4.8% at the end of the year, higher than the 4.5% forecast in June.
- On unemployment, Powell said August’s 5.2% unemployment rate “understates the shortfall in employment, particularly as participation in the labor market has not moved up from the low rates that have prevailed for most of the past year.” However, he also said FOMC members expect continued improvement: “Many on the committee feel that the substantial further progress test for employment has been met … my own view is the test for substantial further progress on employment is all but met.”
- With just one more monthly jobs report due before the next FOMC meeting in November, Powell said the committee just needs to see continued employment progress to move forward on tapering: “For me it wouldn’t take a knockout, great, super-strong employment report. It would take a reasonably good employment report for me to feel like that test is met.”
- Several central banks issued policy decisions during the week. The Bank of Japan held its benchmark rates steady while noting pandemic-related factory shutdowns are pressuring supply chains. The Bank of England held policy steady, yet cautioned that economic growth is slowing and inflation could top 4% by year end. Norway’s central bank increased its benchmark rate from 0% to 0.25%, becoming the first major developed-nation central bank to start tightening fiscal policy.
Final thoughts for investors
Monday’s sharp drop in equities and the relatively quick rebound were reminders that volatility and uncertainty are very real and can emerge from any corner of the global economy. It’s important to stay focused on long-term goals and stay in touch with a financial professional.